The Amazon Whole Foods Buy Out – How It Impacts Food Manufacturers

By Tony Treadway

For many food manufacturers the recent $13.7 billion buy out of Whole Foods by Amazon was a wakeup call of enormous proportion. Suddenly those who were still taking a wait and see position on whether they should market their food products on the online retailer must be scrambling to develop a brand new strategy. Here’s why.

Until the buyout, only 5% of grocery sales were made online. Thus, despite all of the chatter among your co-workers on how they were getting great deals on everything from toilet paper to laundry detergent via Amazon, most of the grocery shopping was, and still is at the local supermarket. The buyout of Whole Foods now puts a rocket pack on the back of every food manufacturer’s need for a digital go-to-market strategy.

 

Projections On Online Grocery Shopping         

Even before the Amazon deal, Nielsen was projecting that 20% of grocery purchases would be made online by 2025. That equates to about $10 billion in annual online sales in today’s dollars, or the equivalent to the sales of 3,900 supermarkets. That shift will have a greater impact on items in the center aisle. Nielsen predicts that 40% of the shift will involve center aisle items migrating to an online shopping experience. If you are into canned goods or packaged goods that means you should be building an Amazon strategy now.

Growth In Private Label

Many food manufacturers have resisted the lure of offering private label versions of their products to their retail customers and that too may change. For example, Whole Foods already generated $2.3 billion in private label sales of their own, amounting to 32% of their Instacart Food category. That is compared to Walmart Grocery’s 16%. Amazon’s current private label brands have not reached anywhere near those percentages until now.

Look for the Amazon-Whole Foods deal to change that dynamic. Whole Foods’ gross margins were much higher (34%), so if Amazon wishes to make a dent in traditional retailer private label sales, they have the margin to do so and there is buzz that Amazon’s next acquisition will make its private label products more appealing to lower income families who gravitate to private label. One indication that can happen is Amazon’s recent decision to lower its membership price for its Amazon Prime membership.

What About Fresh Products?

AmazonFresh had to date only penetrated 15 of America’s largest markets. Now, Amazon will add 465 new Whole Foods locations for even quicker delivery to homes, thus breaking the iceberg that had blocked their national entry.

Opening The Door To E-Commerce

Till now, grocery had the lowest penetration of any e-commerce category at 5%. Amazon is the most powerful e-commerce force in the U.S., so expect them, along with rival Walmart, to dominate the e-commerce grocery category far sooner than 2025 where old predictions were at 20%.

Times have just changed for grocery retailers and our prediction is that other brick-and-mortar retailers may be in the sights of the two 800-pound gorillas on the computer screen.